Tester: But do you agree with the perspective that if interest rates go too high, too fast that it could drive us into a recession?

Powell: It’s certainly a possibility. It’s not our intended outcome at all, but it’s certainly a possibility. And frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want, which is two percent inflation, and still a strong labor market.

— Federal Reserve Chair Jerome Powell, Testimony to Senate Banking Committee, June 22, 2022

With the second quarter’s GDP increasingly likely to be negative for a second consecutive quarter when it is reported on July 28, there is a strong probability that the U.S. economy is in, or close to, a recession. When we last posted a recession watch report in February (Economics Weekly: Are Recession Risks Rising?), we held the view that the economy was not then in a recession, that the very near-term risks were still low, but those risks were also steadily increasing as the Fed tightening cycle was about to get underway. Today, with the impact from the Russian invasion of Ukraine, severe COVID lockdowns in China, inflation having been much higher and stickier than originally believed, and the Fed having to dramatically increase its expected path of tightening (from a forecast 75 basis points by the end of 2022 to 325 basis points!), those recession risks have scaled up considerably. We are also starting to see signs that growth in the real domestic economy is actually slowing, with falling consumer sentiment, weaker housing activity, and recent weakness in commodity prices.

In this Economics Weekly, we again review what the various recession indicators are telling us, with the view that despite the probability of a second consecutive quarter of negative GDP growth, the economy was still probably not in a recession through the second quarter; though the likelihood of entering one over the coming months is now high.

For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.

Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.